Updated: Jan 17
(LUDGROVE NEWSLETTER - DECEMBER 2020)
In previous Ludgrove newsletters we have commented on the severity of the Prime Central London (PCL) property recession and how cheap PCL appears. Our research has shown that the downturn from the 2014 peak is the longest on record and values have declined by 30% in real terms, erasing 13 years of growth. No other PCL recession comes close in terms of duration and the number of years of growth eroded. However is this justified and if not, has negative sentiment presented a pricing anomaly offering home buyers, investors and developers a buying opportunity? Our CEO and former Fund Manager Fraser Slater takes a look.
Context: PCL Prices are at a 13 Year Low
In nominal terms PCL prices peaked in 2014 and have fallen 16%. However over the long term it is important to assess property prices in real (ie inflation-adjusted) terms to adjust for changes in purchasing power. After the market peaked in mid-2014 prices have fallen 30% in real terms and have now returned to mid-2007 levels. Effectively then, there has been zero growth in PCL values in the last 13 years:
Whilst PCL has Been Left Behind in a World of Asset Price Inflation
Taking Q2 2007 as a starting point, negative real interest rates and vast sums of Quantitative Easing has propelled asset values higher across the board, leaving PCL behind. The chart below compares the real-terms growth in prices since Q2 2007:
And Global Wealth Has Surged Ahead
Global prime and ultra-prime property tends to be closely correlated with the Global Wealth rather than traditional housing metrics such as income affordability. Below we look at the (nominal) growth of PCL versus the Credit Suisse Global Wealth Index from 2007. PCL is currently a record 22% below the Global Wealth Index suggesting a catch-up is well over due:
Wholly Out of Kilter with London
All-off the above suggests the recent PCL recession is anomalous, however what is most remarkable is how this recession compares to the mainstream London market in previous recessions. As one would expect past recessions have shown a strong correlation; with PCL typically performing in line with London, plus or minus 4-6% percent (see below). However this recession has seen a -16% nominal decline in prices whilst the mainstream market has powered ahead by +25% leading to a staggering -41% lag between PCL and London:
Certainly tax changes, the threat of a hard-left Government, Brexit and Covid have disproportionately impacted PCL over the last 6 years. However can we justify such a difference?
Taking each factor in turn, our calculations show that stamp duty should account for c5% of the move, the threat of a hard-left Government has disappeared (implying zero impact is justified), Covid may account for a further 5% (as PCL declined -1% in 2020 vs London which appreciated by +4%) which implies Brexit (or any other factor) accounts for 31% of the differential. This looks like a very large overshoot. And at the very least, we find it extremely hard to argue there is much further downside in the PCL market from here.
Over the last 6 years sentiment has been depressed by tax changes, the threat of a hard-left Government, Brexit and Covid. Prices have also underperformed the mainstream London market by -41% and this is out of kilter with prior recessions and extremely hard to justify. When combined with QE-driven asset price inflation and the growth in global wealth since 2007, PCL looks anomalously cheap in our opinion.
Chief Executive of Ludgrove Property Ltd
Tel: +44 (0)207 889 2860
Biography: Fraser Slater is the CEO and Founder of Ludgrove Property. Prior to Ludgrove Fraser spent 20 years in The City. In the course of his career he was a Real Estate Analyst, the Fund Manager of a £6bn Equity portfolio for USS Ltd and the Founder and CEO of WDB Capital, a London based Fund Management business. In 2008 WDB Capital outperformed its peer group by +52% making Fraser's portfolio one of Europe's best performing Funds during the Financial Crisis. In the same year his Fund was nominated New Fund of the Year by EuroHedge. After leaving The City, Fraser started Ludgrove with an ambition to be Prime London's leading Property Buying agency with an emphasis on original research and delivering a highly value-added service to clients.
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